MegaStore Bricks and Mortar/Online Goes Suddenly Bust

There are some lessons from the demise of a one unit megastore/online retail play.

Customers had turned up at Seapets, in Stanway, Colchester, Essex, on Friday, September 2, to find its doors locked and notices in the windows advising them the store had closed down.
...
Seapets had both the superstore location and an online presence. Its website and Facebook pages have been taken down and the telephone line is unmanned.

No reason was given as to how come.  But, the description of the company had disaster written all over it.

With 11,000 SKUs at say merely a $100 minimum order requirement from suppliers, the store had to well over a million in inventory at cost.   We have negative interest rates on bonds, and cheap interest house loans, but not business loans, for the simple reason ex nihilo credit is exceptionally risky, since people are loose with loose (ex nihilo) credit (or perhaps loose credit makes people loose).

Managing 11,000 SKUs even with computers is a lot of work, someone has to review exception reports.

Some of their inventory was livestock, pets, fish, etc...  that is management intensive.  Apparently the inventory in the megastore was less than the online division.

The article was unclear as to when it opened up its online division, it says both "many years" and 2012, but in any event websites are not marketing channels but self-service check-out.  If the online did not reach people who come to the store anyway, or tried to reach people otherwise, then it is a losing proposition.

A megastore tries to compete on price.  The online division uses paypal, which takes a deep cut.  Narrow margins and high expenses are a bad combination.  The game becomes to try to make up in volume what you lose on each sale.

Te article goes on to say "Jerry", one of he owners, had decades in the business and was a minor celebrity judge, etc, at trade shows.  He and a partner started this company in 2003, in the boom years, and built it up then.  Here we go again, the damage is done in the boom years, the shake-out comes with the bust.

There is a interesting comment that they appointed a new freight handler recently.  The people providing logistics, the truckers bringing gods in and out of a business, are an excellent reference for the health of a business.  Freight shipments don't lie.  Just as the Baltic Dry Index is the best judge on international trade activity, so is a truckers view on any given business they serve.

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Best Economic Essay in Ten Years

What have I been saying?  After delineating good and bad credit, finally someone in academia is saying it!

Only then can we understand how the bubble economy’s pseudo-prosperity was fueled by credit flows — debt pyramiding — to inflate asset markets in the process of transferring ownership rights to whomever was willing to take on the largest debt.

Again and again I have pointed out the winners only had to be willing to take on the most debt.  I thought I was the only person pointing this out.  Comes now a couple of professors who explains well why if you have paycheck, property or pension, for the next forty years, you're toast.

That is what makes the seemingly empirical accounting format used in most economic analysis an expression of creditor-oriented pro-rentier ideology. Households do not receive incomes from the houses they live in. The value of the “services” their homes provide does not increase simply because house prices rise, as the national accounts fiction has it. The financial sector does not produce goods or even “real” wealth. And to the extent that it produces services, much of this serves to redirect revenues to rentiers, not to generate wages and profits.

Some will argue, all those tellers and loan officers and Vice Presidents and janitors and rent-a-cops are certainly being paid wages generated and stockholders and Presidents get profits.  No.  They are just minion-rentiers who are tossed some redirected revenues for making actual the redirection in toto.

Here is an important point, upon which I will intrude...

Economic theory today is in some ways a step backward by expunging the nineteenth-century view — and indeed that of medieval economics and even of classical antiquity — with regard to how banking and high finance intrude into economic life to impose austerity and polarize the distribution of wealth and income.

How is this distribution of wealth effected?  Titles.  Ex nihilo credit is available to borrowers from hegemon-chartered entities.  People who are wholly engaged in loaning credit, something from nothing, are able to attach at least a partial lien, if not a clear title, to at least a portion if the means of production and real wealth such as homes.  A slice here, a chunk there, it can add up.  Their slice is purely inflation, but since all loan-involved investments are marginal, and the lender's title is superior, when the economic actor is overwhelmed in his measure, all spoils go to the lender.  It is a neat trick.  Wait a minute.  It is just the pigeon drop scam!

What you don't know at this point is that your new acquaintances are running a scam, and you're the target. The first stranger earned your confidence, so that when the second stranger presented a moneymaking opportunity, you had someone you trusted telling you that it was a good idea. The first tip-off to the pigeon drop, then, is when you find yourself with a new friend, followed soon after by a chance for the two of you to cash in with the help of a third person.

Your new acquaintance is a real estate broker who instills the confidence, and the second stranger is the banker, who can make a money maker happen, a home (or a job ((a degree)) or a car...  you name it.)  It's the same set up over and over, but it is legal.  There is nothing in the bag of value, except what money or title obligations you put in.  Later, you realize you got nothing, they got the titles.  Titles to your future income stream. Except no one hides this, because it is enforced by law.

For example, in one instance, as homes are sold and debt is assigned, who has the title to the goods?  Well, you, as long as you can make payments and pay taxes. But one gross distortion is since the 1980s in USA you cannot get a mortgage without very special circumstances (maybe farmland).  Now you get a deed of trust, which allows banks to fast track foreclose, so they can get the home resold faster.

Onward,

James Tobin already in 1984 worried that “we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services” (Tobin 1984, 14)

Yes, a specialty retailer who had a storied life was closing down and lamented we lost two, maybe three generations of entrepreneurs.  They went instead for the skim.  After noting a business loan is paid for out of the proceeds from the new means of production created, home loans must be paid out of the current income of the borrower.  The house itself provides no income.

Mortgages are also special in that real estate assets have grown into the largest asset market in all western economies, and the one with the most widespread participation. Following classical analysis, if every real estate asset bought on credit skims off the income of the owner-borrower, then the rise in home ownership since the 1970s has sharply increased rent extraction and turned it into a flow of interest to mortgage lenders. 

Everything changed in the 1970s.  When Nixon took us off the gold standard (lite).

Bank credit to the nonbank “asset” sector (mainly for real estate, but also LBOs and takeover loans to buy companies, margin loans for stock and bond arbitrage, and derivative bets) does not enter the “real sector” to finance tangible capital formation or wages. Its principal immediate effect is to inflate prices for property and other assets. Recent econometric analysis confirms that mortgage credit causes house price to increase (Favara and Imbs 2014) — and not just vice versa, as in the demand-driven textbook credit market theories.

Any real estate agent in the 1990s could have told you that if you could afford a $200,000 house at 9% interest, you can afford a $300,000 house a 6% interest.  Academics figured this out only in 2014? So, when the interest rates dropped from 9% to 6% did people trade up to more or better homes?  No way.  A $200,000 house at 9% interest becomes a $300,000 house at 6% interest.  Imagine how overpriced the homes people are getting now at 4%.  That $200,000 house is now priced at $600,000.  If and when the economy crashes, wages, income, etc goes back to at least lower, one way or another.  But the nominal debt stays at $600,000.  Because of your marginal exposure, Warren Buffett picks it up for pennies of ex nihilo credit on the dollar for Berkshire Hathaway, and you must at best bankrupt your "loss."

How does this asset-price inflation affect the economy of production and wages and profits? In due course this process involves increasing the debt-to-GDP ratio by raising household debt, mortgage debt, corporate and state, local and government debt levels. This debt requires the real sector to pay debt service — a fact that prompted Benjamin Friedman (2009, 34) to write that “an important question — which no one seems interested in addressing — is what fraction of the economy’s total returns … is absorbed up front by the financial industry.”

Yes.  Good question.  And the follow-up question would be, to whom does it go?  The answer will be, the 1%.

To ignore this rising fraction is to ignore debt and its consequence: debt deflation of the “real” economy. Of course, the reason why debt leveraging continued so long was precisely because credit to the FIRE sector inflated asset prices faster than debt service rose — as long as interest rates were falling. The tidal wave of post-1980 central bank and commercial bank liquidity drove interest rates down, increasing capitalization ratios for rental income corporate cash flow.

He is hitting on something here... credit inflation, debt deflation.  Two sides of the same coin? I'll have to turn that over in my mind.  And this is good stuff:

A debt-leveraged rise in asset prices has a liability counterpart on the balance sheet of households and firms. Homes, commercial properties, stocks, and bonds are loaded down with debt as they are traded many times by investors or speculators taking out larger and larger loans at easier and easier terms: lower down-payments, zero-amortization (interest-only) loans and outright “liars’ loans” with brokers and their bankers filing false income declarations and crooked property valuations, to be packaged and sold to pension funds, German Landesbanks, and other institutional investors. Each new debt-leveraged sale may bid up prices for these assets.
But the credit can be repaid (with interest) only by withdrawing payment from the “real” sector (out of profits and wages), or by selling financialized assets, or borrowing yet more credit (“Ponzi lending”). The rising indebtedness approaching the 2008 crest was carried not so much by diverting current income away from buying goods and services or by selling financial assets, but by loading down the economy’s balance sheet and national income with yet more debt (that is, by borrowing the interest falling due, for example, by home equity loans). What kept the “Great Moderation” income growth and inflation levels so “moderate” was an exponential flood of credit (i.e., debt) to carry the accumulation and compounding of interest. It was like having to finance a chain letter on an economy-wide scale, with banks creating the credit to keep the scheme going.

And this...  well, it also constrains the creation of means of production the would generate a surplus from what it produces.  What cannot go on will end at some point.

This is the institutional reality behind the negative correlation coefficient of credit and income growth, reported in the previous section. In fact, to assess credit for its income growth potential is to miss its true function in the rentier economic system. The FIRE sector’s real estate, financial system, monopolies, and other rent-extracting “tollbooth” privileges are not valued in terms of their contribution to production or living standards, but by how much they can extract from the economy. By classical definition, these rentier payments are not technologically necessary for production, distribution, and consumption. They are not investments in the economy’s productive capacity, but extraction from the surplus it produces.

Now this needs a bit of explication.

Financial markets can grow sustainably — that is, without rising fragility — only when loans to the real sector are self-amortizing. For instance, the thirty-year home mortgages typical after World War II were paid over the working life of homebuyers. The interest charges often added up to more than the property’s seller received, but the loans financed about two million new homes built each year in the United States in the early post-war decades, creating enough economic growth to pay down the loans.

Things were very different then. Home loans were for mortgages, not deeds of trust, financed largely by Savings and Loans and Credit Unions in which the interest rate, about the same today, 4.75%. in 1955, barely covered the costs of administration of the loan.  The loan was against money,  the cash in the pay envelope deposited on the first Friday of the month into the S&L or CU, backed by gold and silver.  And the loan terms were usually 20 years, because that is all it took to comfortably pay off a note.  There was no Freddie Mac to create inflation by vacuuming up as much paper as anyone could generate.  That would not come until... wait for it... the 1970s.  But there were assumable loans, meaning instead of flipping homes and inflating values, I might get a job offer in another town and just pass my mortgage onto someone else who continued the payments.  The S&L just wanted its money back, could care less from whom.  So yes real estate markets can grow sustainably, but nothing we have today resembles when last we had a sustainable market.

And this too:

Many U.S. students could not attain a college degree without student loans.

 Not true, false dilemma. The fact is EZCredit is merely more attractive, buy-now pay-later, than a pay-as-you-go degree, granted that ex nihilo credit woefully overpriced an ever degraded degree.

In addition to showing that the financial industry accounted for 7.9 percent of U.S. GDP in 2007 (up from 2.8 percent in 1950), they calculated that much of this took the form of fees and markups — the quintessential transfer payments. 

OK, useful figure, let's call it the 5 point growth.  That 5 point growth generated, as this essay demonstrates, a false economy, unreal GDP proportion reported as GDP. So then we must ask, what per cent of 5 point growth is of the distortion of reported GDP, generated by financial engineering?  And better yet, net of false economy FIRE financial engineering portion, to what does the "7.9% of GDP" truly amount?

This raises a vital question for today’s economies. Can debt-financed rising asset prices make economies richer on a sustainable basis? If the aim of raising asset prices is to increase the capitalization rate of rents and profits by lowering interest rates, can pension funds, insurance companies, and retirees save enough for their retirement out of current earnings, or can they live by capital gains alone?

As for today's economies, the question is moot.  Retirees are being "sicked-in" to hospices, shaken down for all of their assets, and dispatched at necessary rates to help maintain balance.  So the question is not vital for today, today's retirees are being queue'd up for extinction in this Darwinist polity.  The question is vital to whomever makes it through the progressing disintegration.

Financial and other investors focus on total returns, defined as income plus “capital” gains. But although the original U.S. income tax code treated capital gains as income, these asset-price gains do not appear in the NIPA. The logic of their exclusion seems to be that what is not seen has less of a chance of being taxed. That is why financial assets are called “invisibles,” in contrast to land as the most visible “hard” asset.

Yes, as I have been saying here, when we switched from vendor-financing for industry and commerce to bank finance starting in the 1970s, that which was near impossible to tax for the impracticality of it, such diffuse records, now became easy to tax with ex nihilo credit ascendency since the records could be found in one place: banks.

That this was a conscious agenda item is revealed in the fact when the FED was first set up back in 1913, the FED engaged in an intensive campaign for business to switch from vendor financing to Trade Acceptances ostensibly to improve commercial efficiency.  "Let the banks process your receivables for you."  It did not work, USA business did not fall for that ruse.  But with ex nihilo credit after 1971, it worked like a dream. No a ten cent retail purchase can be tracked and taxed.

Here again, as perspicacious as this essay is, it is prolegomenous.  It will be interesting to know what the prescriptions are, just how to save the Hegemon's system from its greediest outliers?  Sure, whoever borrowed the most won for a while, but not any more.  They are dropping like flies.  Now let's discover what the sustainable limits are in the pigreon drop scam.

It is an economy where resources flow to the FIRE sector rather than to moderate-return fixed capital formation. 

Yes, to what I have referred here elsewhere on the blog as "exceptional wealth."  the 1% did not earn their exceptional wealth, in a free market.  They stole it fair an square, legitimately.

Should it be redistributed?  No way!  Simply delegitimize charging interest, that is deregulate finance at least as far as making interest a non-enforceable contract item, just as gambling debts are non-enforceable in USA, and watch the "wealth" first deflate as it is marked to market, and then redistribute perfectly as the accumulators lose the wherewithal to ever corrupt more and more players: economists, politicians, professors, Wall Street actors, industry, religion, law, ad nauseum.  Delegitimize and redistribution happens automatically and fairly.  Will capital fly?  Sure, when it is that light, ligher than air, mere notional, it sure will.  But where?  "I have $10 billion tallied in ex nihilo credit obligations due me, will you give me refuge in Switzerland?"  "Convert it to gold first, then show up in our airport.  Good luck."  Good luck indeed getting away from the Hegemon with that.

Such economies polarize increasingly between property owners and industry/labor, creating financial tensions as imbalances build up. It ends in tears as debts overwhelm productive structures and household budgets. Asset prices fall, and land and houses are forfeited.

A good portion of it forfeited to the state, hence its recurrence.  The Hegemon could care less if this is unwound rationally, fairly peacefully, or if there is a world war.  Note when the Soviet empire crashed, existentially ended, all of the previous players remained at the top. The gentle unwinding process of eliminating the legitimization of interest (for without it ex nihilo credit will disappear too) would be acceptable to the hegemon, just as the surprise insurgency of a Donald Trump is acceptable (and the moment he is not acceptable, he'll get a serious headache, like a Kennedy).

The summary is excellent, I recommend highly clicking on the link up top and reading the whole thing.

Somehow, I haven't figured it out yet, and apparently no one else has either, if ex nihilo credit and negative interest rates are correlated, and the significance thereof.  There may be a clue in ex nihilo credit inflation/price deflation. I dunno. Whoever figures this out will be so far ahead of everyone else.

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Small Business Development Theatre

NPR was interviewing a dot.com founder on an upcoming meeting with the President, to discuss something to do with business development.  What I heard was along the lines of

We tell the story of the new product to the retailers.

Wait, retailers could care less about a story, what they want is to test out products on the only opinion that matters, and that is the customers.  So ever looking for changes and differences,  I looked up stories on The Grommet.  If you look at this on the 18th of June, you'll see in their home page splash the celebration with the White House.

Now, what we would expect is first and foremost success stories...  and what do we get, from the Q&A...

On The Grommet's US-made and eco-friendly focus, and why it's not being picked up by major retailers:We noticed five years ago that there was going to be a really strong interest in shopping by values. It was created by our disappointment with large institutions, whether dealing with an economic crisis or leaders who let us down. People were stepping back and saying "What am I participating in here when I purchase?" Even if not consciously, people understand it's the strongest way to take action—which businesses you support. There wasn't really a focus for it and we really invented the idea of overtly and easily shopping by values. You can decide on our site what your most important criteria is and shop that way. Big guys have a DNA, it's different. A large retailer might be leading with price or operations. If you're Fab you're leading with design, not with values. With Etsy you're leading with handcraft or vintage. We're leading with values and nobody else is doing that.

"We noticed ... there was going to be..."  How?  What was the objective data?  And of course big business does not want what they offer.  But small business is not going to want "stories" either, they want sales.

On sourcing vendors:It's half people submitting a product that's not their because they love it and want us to know about it; we look at everything they submit. And then it's half submitting their own product—there's a spot on the site with a gallery for it. We've received a lot of attention for our use of Pinterest, because we have a group board where we invite people to contribute and people suggest grommets there and it's a high yield place for us for great ideas. We're very active on the crowd-funding platforms and we partner directly with Indiegogo so we get involved early, even pre-production and do a little funding. We've launched probably 10 or 15 products off those platforms.

Signal to noise.  "A lot of interest..." " half the people..." "high yield..interest"  "very active.." "We've launched probably..."  how come no hard facts.  This is dot.com talk all over again. And then, how to process all of this as a business?

At this point the products we launched in 2009 that became big—Soda Stream, Alex & Ani, Bananagrams—those are products that many people know and you can find in major distribution.

Hang on, Soda Stream is a product invented in 1903, and has worldwide distribution, was bought by Israeli investors in 1998 who produce it controversially in the occupied territories.  Perhaps SodaStream used Grommet as yet another promotional venue as kickstarter is being used by well-funded companies, but to say Soda Stream was launched by Grommet is a bit of a stretch.  I mean a huuuuuuuge stretch.

What is the success rate, are they making money?

We have a perfect visibility on that because we've built such a great community that tells us within 24 hours of launching a product whether it will have high appeal commercially or socially. That data is our goal, and sharing it with new companies launching. It gives them a lot of credibility when they want to get further media or retail support, even manufacturing. They are all watching us like a hawk.

Doesn't Amazon do this far better?  And expect no fees?  And what is "high appeal socially?"  I think this may be what Ogilvy condemned, "eyeballs' vs "sales."

And this I can make no sense of...

I don't see us as a retailer; that's what retailers do. If they have a good idea they try to hide it, it's a competitive business. But they are human beings too and they do want to support these kinds of companies but you can't do it until some of the risk is taken out. Increasingly we've been working directly with larger retailers to let them know these companies can handle operationally what they are doing, they are proven, here's our experience with them. We're like the ambassador for these companies; it's meaningful. We're a weird company in that we cooperate. It's interesting to get into the economics of it. It protects the next little guy coming along. I like to affiliate with companies that change something and we've stuck with the same idea for a long time.

What little might make sense is alien to the reality on the ground, and I hope it is just bad journalism, not reflection of the thoughts of the founder.  But it sure sounds like more noise to signal.

She goes on to say she trademarked "citizen commerce."  Unh...  "let's make this for the people by introducing violence to the scenario."  What possible value does trademarking a slogan bring to the scenario?  And what does it mean?  As opposed to government contracts?

And it may not matter, the goal may have been achieved, because she sold a majority to Japan investors:

The news this week is that Lexington, MA-based Grommet has a new majority owner—Japanese e-commerce giant Rakuten—thanks to an unspecified new investment. Rakuten led the startup’s Series B round last September, and Grommet also has raised about $6 million in angel investment ($4.4 million paid in capital).
And next month, the startup—which has grown from 10 to 43 employees in the past year or so—will move into new digs right on the Cambridge-Somerville border, near Davis Square. Its new mailing address will be in Somerville to reflect “more of a hacker/maker community,” Pieri says.

More money, let's blow it.   They should have moved to Peoria.

And while Grommet’s mission hasn’t changed, it does need to serve its new master. “Our role in life is to discover and curate the best ideas and products out there, and help them scale,” Pieri says. “We de-risk them to help them move forward to Rakuten’s store” and other large retailers.

Two problems here and one surprise.

1. Curating is a fun buzz word, but that is too big of a job for one company.

2. De-risk is the work of the entrpreneur, essentially handled in design, and cannot be farmed out.

3.  Surprise: she has divined that entrepreneurs never take risks.

Rakuten is sometimes referred to as the “Amazon of Japan.” But it sells itself culturally as the opposite of Amazon. “Rakuten doesn’t undermine its partners,” Pieri says. “A lot of our vendors have a problem with Amazon.”

No they don't.  I've been a supplier to Amazon for a decade, and they have never undercut me or anyone else as far as I know.  So this is a false premise.  And she indicates her stable is a self-selected group of people who did not work well with Amazon.  Not sure that is the group you want.

Also, Japan's experience in retailing in USA is not stellar.

And then this:

 “Most of shopping isn’t transactional, it’s about discovery or connecting with the creator of a product. It’s about walking down that cool street in a town, it’s all about story and personal experience. Amazon can’t retrofit around that, that’s not its business.”

If you narrow the idea of shopping to browsing in specialty stores, then there is some of that walking down that cool street in town, but that is in specialty stores and galleries.  Online can bring nothing to this experience, but nonetheless, this is what the Grommet proposes.  Also, if amazon cared for this business, it need not "retrofit" it would simply step in and take it too.  With unlimited debt creation, it can do as it pleases.

The funny thing is, those cool streets  have gotten shorter as cities and the feds destroy the middle class and the architecture to support it.  We need a crash in commercial real estate so we can get back to rational rents and small business thrive again.  FED policy and tax laws are killing the middle class, and capitalism is over, it is just a matter of what event triggers the crash.  In the meantime, small businesses will be exponentially more valuable as they fill in.

This is people not succeeding, or at least extending a false economy, celebrating in the White House with people who want to crush small business.  It makes sense.

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Competing On Design: Sweatshirts

Here is a story on a designer sweatshirt maker that is making many right moves, but I think will fail pretty quickly for some pretty classical errors.  These are errors I warn against when I teach the better way of proceeding. he called in designers for his Sweatshirt, which is a very good idea. 

For starters, it appears to weigh more than two pounds. The fabric, which is 100% cotton, feels about three times thicker than most sweatshirts. And ribbed paneling along the shoulders and sides help create a tailored look, eliminating the boxy silhouette of most hoodies. Bayard said he spent about eight months designing it with the help of former Apple engineer Philipe Manoux and world-renowned pattern designer Steve Mootoo.

 Obviously the design is valid, since it is selling well, at $89.  I notice College Logo hoodies are in the $60 - 80 range, so if these are obviously nicer quality, the price should attract, and it does.  

The zip-up hoodie, made by San Francisco startup American Giant, costs $89. It had been on the market for 10 months when a December 2012 Slate article declared it "the greatest hoodie ever made" and suddenly sales exploded.

Now this is dangerous.  A blip from a news article, and sales jump.  An increase due to an article is usually not sustainable.    Careful about meeting such demand.

“We are absolutely throttled down on manufacturing,” Winthrop said. “We are maxing out all of our capacity at all of our factories. As much as they can give us, we are taking.”

Now this is fine since they are using subcontractors, who are probably delighted to get the work.   And farming the work out means they are not investing in plant and equipment.  Very good. But next, the model is business to consumers, which I question...

The company advertises that it’s “bringing back American manufacturing” and pledges to never outsource jobs overseas. It can afford the higher labor costs in the U.S. because it is a direct-to-consumer business and therefore avoids expensive overhead associated with brick-and-mortar stores.

Four problems here.  1. Nobody cares where clothes are made. There are no studies showing peoples' preferences depend on where something is made.  Sure, no end to surveys that SAY people prefer made in USA, but when it comes to actually buying, they contradict themselves in action.  American Apparel advertises made in USA as well, but plenty of importers out sell them.  If you spend time promoting what no one cares about, then you are wasting time and money.  

2. Manufacturing clothes in USA is still a big business, look at where your tshirt is made.  But it is the cheap stuff made here (see American Apparel).  Quality is made overseas since it is management intensive plus the duties and restrictions cause producers to have their expensive stuff made overseas, as anti-trade barriers in cotton goods are by weight, not cost.

3. A promise to never outsource overseas is extremely unwise, when Federal policy is get big or get out, and having regs directed at ruining specifically you can and will be written.  Here they do it to lettuce growers. People go overseas to stay in business, not to save money.  The fourth problem relates to brick and mortar, but let's let them expand first....

“One of the great unspoken, dirty secrets about the apparel industry is that brands for the last 40 years have been investing a tiny amount in the product to sustain huge marketing and huge distribution costs,” Winthrop said. “In American Giant’s case, we do almost the exact opposite of that.”

So above they say their model is business to consumer and here they reveal a "secret."  Whole lotta errors here, and one of the biggest mistakes you can make in business, indeed life, is to believe your own PR.  First wholesale (business) to consumer is a bad idea since online sales are only about 6% of retail sales in USA.  That means this company will miss about 94% of their potential market. 

The "dirty secret" described relates to the specialty market, not the Walmart model.  It is no secret, since everyone already knows it.  Everyone knows the model, and yet 94% still prefer to walk into brick and mortar.

Specialty brick and mortar are constantly looking for such things as new sweatshirts, a luxury version.  Now someone will come along and offer a $400 retail version, but the quantities will be very low.  Sine the quantities are low, the markups are high to cover the costs of all those involved.  At $400, Saks will sell through.  The vendor to Saks will make more money doing less work that American Giant.  Just because you can sell X at $89 does not mean you cannot sell Y at $400.  And no assurance you'll make more profit at X than Y overall.

Of course higher price slows down demand, demand is a problem with which American Giant contends.  Further, as a start-up, their brand would be associated with Saks and Neiman, etc, not a bad association as the company moves forward.

Companies that have a higher revenue in relation to lower production are easier to finance than otherwise.

By eschewing those leading retailers, he is also denying himself steady feedback that is valid and reliable, upon which he could build his company, like a Nike.

The opposite of the "dirty secret" is what Walmart does.  So here we have a specialty product being sold on the Walmart model.

What goes on is not a  secret, dirty or otherwise, it has been around about 5000 years, not 40,  it relates to about 20% of the market, not 80%, what they claim is secret is well-known and beneficial, and their response is to adopt the Walmart model.  My guess is if and when American Giant gets to numbers that interests Walmart, having proven the Walmart model is good for their sweatshirt, Walmart will put their version of the same thing on Walmart  brick and mortar shelves AND the Walmart website.   At $59, same quality, made overseas.

Looking ahead, Winthrop said he plans on sticking to the basics: t-shirts, jackets, hoodies and sweatpants.
“When we think about next year, just being in stock — not expanding the product mix — but just being in stock will be a huge lever up for us,” he said.

Sitting duck.  He should be wholesaling to specialty retailers and working on new designs.  Fine if they are just tshirts, sweatpants, etc, if that is what customer feedback says.  My guess is he'll stock up as demand wanes, because the news article plug is a lightning that will not strike twice.  

My predictions as to who will make it has been pretty good over the last decade.  I wish all small businesses good luck and success, but some moves are deleterious.  Not too late to change the model, but the mantra needs to be "our opinion does not matter" and get in front of the opinions that do matter, 94% of the market, the brick and mortar specialty stores, at a higher price.

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Outsourcing Your Own Job

Anthony checks in with an article about a fellow who enterprisingly off-shored his own job.  Per Anthony:

"The employee, an "inoffensive and quiet" but talented man versed in several programming languages, "spent less than one fifth of his six-figure salary for a Chinese firm to do his job for him", Mr Valentine said.

"Authentication was no problem. He physically FedExed his RSA [security] token to China so that the third-party contractor could log-in under his credentials during the workday. It would appear that he was working an average nine-to-five work day," he added.

http://www.bbc.co.uk/news/technology-21043693

And he watched cat videos!  He could have started another business. 

Now this comports with the advice I have given here about no longer thinking of yourself as an employee, but of your employer as a "client."  I wonder if the fellow read my posts?  He seems to have organized the management of his "clients" projects well.  Admirable!

I am not sure why anyone is surprised by this, I heard of this sort of thing going on back in the 1980s.  I imagine it has blossomed wonderfully.  And it makes one wonder about the HB-1 visa program, that offers employment in USA to brilliant software engineers from overseas.  Perhaps aplenty of those brilliant software engineers who do the work of ten in fact have a posse of ten back home working away for 20% of a USA income.

If this is widespread, then I would understand how USA born and raised engineers would be miffed at the competitive advantage the HB-1 visa holder might have.  But this would be pusillanimous.  If it works, those USA-bed engineers should be lining up crews overseas to do their work, and be every bit as competitive as HB-1 visa holders.  Don't envy success, learn from it, adapt to it.

Now no doubt this fellow will lose his job and face possible sanctions.  Too bad!  We have so many people doing wonderful things, and then we prosecute them.  Like a nine year old kid who scammed his way onto airlines so he could go visit his grandpa, and the teen who eluded law-enforcement for years, sometimes by stealing airplanes he intuited how to fly!  I want to work with these people...  they should be teaching!  We ought not be prosecuting them!

So, again, stop thinking of yourself as an employee, and think of your employer as a client.  Do as much as you can for your client, for the least amount of money.  And think of this client as only one in a series you'll be serving as a customer employed independent contractor.   Who knows what brilliant plots you'll hatch.

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Competing On Design: How China Is Winning

I teach that if you want your product to sell in USA, it must be designed in USA, by USA designers.  China has opened a design center in USA so they can sell their cars in USA.

One particular complaint about auto repair is we are at the mercy of the mechanics.  The Chinese cars will have a system in which all owners of their cars will know by diagnostic equipment what the problem is before they enter a repair shop.  They will have access to DIY solutions.  They will share their knowledge with all other owners of cars.

In USA, automakers buy ratings from JD Powers, scam the repair reporting system to gain higher rankings, and bail-out failed companies.  In the meantime, the Chinese simply listen to the consumer.  It is a disgrace that USA has not come up with such a system.  But then why should they?  They know they will always be bailed out.

China has announced they do not intend to make shoes for Nike, they intend ot be Nike.

So far so good.

I teach cheap labor is not a factor in international trade. What matters is management.  USA management competes with foreign management.  China has offered to rebuild USA infrastructure.   

Over the past 10 years, China Construction America has grown from about a dozen employees to today's 1,000 in the US. Ninety percent of the staff, according to Yuan, are local hires.

...

"We only employ union workers at our New York job sites," said Yuan, adding the company agreed to follow the "Buy America" rule for the Alexandra Hamilton Bridge project as one condition prior to the bid.

What to make of this?  if the 900 are USA citizens and 100 are Chinese, we can imagine the 100 are managers.  The Chinese buy “America” and hire union labor. What matters is management.  USA management competes with foreign management. 

The Chinese no doubt lost a bundle getting to this point, but so does USA getting to the point where Boeing jets sell well overseas.  What sustains them is competence.


Not all Chinese have gotten the message.  Heavy ad dollars are going into this new brand:

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Anthony On Pollution

On Jul 9, 2011, at 10:55 AM, Anthony wrote:

Spured on by news of the gold in California, Konrad Spiers migrates from Shiny Rock, VA to  Fair Play, CA where he finds gold in the Cosumnes River and stakes a claim.    Konrad does well, but the placer deposits quickly run out.   Undeterred, Konrad starts to use Mercury to extract the fine flour gold from the river.     After a period of a few months, downstream,  rancher Hubert Wiley wakes up to find his 100 head of cattle died of mercury poisoning.  Further downstream, citizens of Rancho Murieta start suffering the effects of mercury poisoning.   

How would the free market settle this?   If true property rights are enforced how could the poisoning of a river, a limited resource needed by all,  be prevented?   What happens if the cost of cleanup and restitution costs more than Konrad's entire estate?   How would the free market clean up the river?

All law starts with property law, and property law starts with riparian law: law concerning riverbanks.  So it is with natural law, upon which free markets are based.

In property rights, sequence matters.  Before man, animal poop got in the river. Let's take a safe bet and say Hubert Wiley was ranching the territory before the town of Rancho Murieta formed.  No doubt Hubert Wiley was conserving cow poop as fertilzer, but no doubt also cow poop got in the river. So the fact that cows pooped in the river before Rancho Murieta formed means Rancho Murieta lives with that fact.  What limits the cow poop is not only its value as fertilser, it is also Hubert Wiley can only farm so much territory, so he can only turn so much land into private property, can handle only so many cows.  Wealth is limited to what you can personally (or your family unit) can work.  (Where I part company with capitalists is they accept usury and employment, which allows the few to trap the many and distort the free market.)

So we have a stasis between the town and Wiley. Then comes the wicked Konrad Spiers.  Konrad Spiers can homestead upriver to the extent that he does nothing that harms the quiet enjoyment of the property of the people downriver of him, nor can the downriver people harm the quiet enjoyment of Konrad Spiers on his property.  If downriver they have formed uses that require 100,000 gallons river flow per day, of a million gallon river flow, then Konrad can start using some of the unused 900,000 gallon river flow.  The people downriver may not dam it up to the point that it floods out Konrad Spiers.

I know you made up your story because Spiers would have been shot when the first cow got sick.  That much mercury would have been noted and the word would get out quickly.    But let's go with your story...

As soon as silt starting gumming up the works downriver, a lawsuit would have been enjoined, requiring Spiers stop and ordering damages paid.  This was what kept polluters at bay for some 800 years of common law.  You can read in Morton Horwitz's book, case by case, how courts in USA shifted from property rights to utilitarianism, with the principle of the greatest good for the greatest number, with government as the arbiter, instead of the law.  Once the courts began ruling the dirty coal plant was more important than the old lady's laundry, there was no limit on the size and damage of big biz pollution.  In USA we socialize the cost of pollution, instead of making the perpetrator pay for it.

Under property rights, Spiers would be obliged to account for every gram of mercury. If he brought on 1000 grams and used it, he would have to reclaim the same 1000 from the process.  If he cheated he would be liable for the cost.  He would never exceed the ability to cover the cost because his damage would be immediately seen.  

Only governments can protect polluters, and they do, for example, by licensing nuclear power plants that are so very poorly designed and managed.  if GE were responsible for the cost of cleanup, we would have alternative power sources.  If we had to pay what it costs to produce power, we'd use far less an waste almost none.  This is why the Bonneville Power Administration is so abjectly evil.

Under property rights, in common law, the basis of the free market, you must keep your mess on your property.  This keeps the cost borne by those who would make the mess. Instead, we have a system where people exploit the chaos we always have when there is a government involved.

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Designer Royalties

What the record companies and publishers do, is say, invest $5000 (or $5 million) getting a book or CD out in the market place... then the first $5000 (or whatever) the design earns in royalties for the designer, the publisher keeps to pay back the costs of getting the work out there...  it’s an illustration of how as a company gets bigger, it starts calling more shots.  The implicit reverse is, dsigners get a very good deal working with small and start -up compaines, with the straight royaltiy deal. 

What then begins to happen, and pharmaceutical companies do a versiuon of this with the "costs" of producing a drug, is they begin to live ever more lavish lifestyles, charge it off to development, and then claim these costs are critical to development.  We just absolutely must have chilled caviar on the private jet taking us to vail for our corporate retreat.  Otherwise there will be no new drugs.

With intellectual property rights, costs go up, quality goes down, options are limited, we are burned.

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S Inquires About Competing on Aesthetics (Superficial Design)

S Writes:

My question to you concerns my passion for design, namely design of household items that exploit surface design like textiles, pillows, quilts, curtains, linens, and lamp shades – products that are subject to the dictates of aesthetics (the 'colors' or 'lines of the year'), rather than the merits of their functionality.  ... I'm guessing my passion for surface and interior design is a different animal than design for objects whose functionality can be improved upon, since changing an objects surface design doesn't change or improve its functionality.  But I could be wrong.  Does 'new' (theoretically, improved) surface design 'count' in the same way as new, innovative 'functional' design?  That is, does new surface design enhance a product and provide added value in the same way that enhanced functionality of a product design does?

***Yes, the element is aspiration.  Surface design, superficial, aesthetic, whatever you want to call it matters very much.  When my late great boss said, cheap material, lots of design, he was hitting on superficial.  Iconography is the study of images and what they mean.  There are esoteric images, with meanings only to a select group, or a secret society, such as the strange images all over USA currency, meaningful only to Masons, and then there are exoteric images everyone instantly understands, such as a hammer and sickle.  

Let’s look at functional vs. aesthetical.

People have always loved toast, patiently held over the fire, and cooked to perfection.  With electricity one clever person lined up 4 heating elements and invented the electric toaster.  Lots of toast quickly met the aspirations of a housekeeper to please many at once.  We do not recall this today, when perfect toast is cheap and plentiful.

So it is with surface treatment.  Aesthetics communicates information, and color and texture are only two elements.  There are volumes written on this, and for my part, a good designer already has these skills naturally.  What the aesthetics communicate is why the customer buys.  

The Ford Thunderbird, the Jaguar S and the Lincoln LS are the exact same car, made in the same factories by the same workers, with the same engine, drive train, brakes, shocks, etc, with only superficial aesthetical differences.  But the buyer of each version possesses different aspirations: one the sportster, the other the serious go getter american, he other the cosmopolitan Brit...  Aesthetics, if ordered to feeding aspirations, is big money.

The most common experience of aspirations met superficially is wall coating.  What does the color (or surface) chosen say about the resident whose walls express a certain tonal quality? Design is both form and function, and sometimes form is the function.

Apparel fashion is very much tangled with all of this.  The little black dress becomes a subtle power with a string of pearls.  A little white dress with a string of black pearls disorients he who encounters it.  Aesthetics is a key to competing on design.***

Although I'm very interested in it, I don't have any experience in surface design and I don't feel strongly that I need to be the surface designer of the beautiful materials these household items are made from, but I would LOVE to be the one to bring these objects to market.  

***Division of labor: the one thing all of those mighty design talents lack is the ability to bring it to market.  Bring it to market is your role and value, it is part of what you get paid for.***

Although apparel is a very close second, I can't think of any objects I love more than these domestic objects that have been around and unimproved upon in forever.  I guess I'm wondering if there's a place for me in the import business where I can deal in these products whose major appeal is aesthetic design rather than innovative functionality.  Aren't the beautiful, 'unimproved' household objects (and apparel) sold by Nordstrom's, Macy's, and Z-Gallerie purchased by their buyers who buy from sales reps who in turn buy from importers?  Although I haven't checked into it, being an independent sales rep sounds interesting, but I'm not sure I'd want to work as a buyer for a large corporation.

***Such store buyers cannot warrant the time to source and process a purchase form o overseas of say $5000 with of goods, even if they can sell them for $20,000, assuming they can, since at this point saleability is an unknown, given the item is new.  (No one ever knows what will sell, any who believes he can predict such is delusional.)  For the same five days worth of work, they can process a million worth of goods, although only $200,000 in net profits. 

 You can buy $5000 worth of goods and sell for ten that the stores sell for $20,000, making $10,000 profit.  The simply cannot locate the resources for what is a net $5000 margin.  And to add to the complexity, no store would take $20K retail of new to test. You can and will gladly work 5 days for $5000.

The stores first orders, test orders, to you, are small.  Over time, years in fact, you improve the item with iterations to the point that it becomes worth the stores while to go directly and buy their own version from the factory, since the volumes are now worth it.

One element that surprises me perennially is how people are frozen in fear of events that do not and cannot occur in business.  “Won’t they steal my idea...?”  and  “they can just go around me...”  Neither happens in the real world, at least at the specialty level.***

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China Builds 15 Story Hotel In Six Days

Such a project is management intensive...  I bet these are some of the best paid labor in China...  when we go overseas, we exploit superior management, not cheap labor.  Cheap labor is never a factor in international trade.

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Country of Origin Issues

If 90% of my widget is built from parts manufactured overseas, and I do the final assembly here in the US,  can I say my widget is American Made?   Is there a percentage threshold allowing you to say Made in America vs Made in xxxx?

Anthony

Anthony,

Yes, there are rules, and yes they usually depend on chief value, which step or component added the chief value...  You'll usually read this as "Proudly assembled in USA"

Here is how New Balance handles it:

New Balance is the only athletic shoe manufacturer still making shoes in the US. We’re proud of that commitment. We're proud of the workers in our five New England factories.  And we're proud to say that 25% of our shoes sold in North America are made or assembled right here

Made or Assembled in America

Twenty-five percent of New Balance shoes sold in North America are produced by our US workforce using US and imported materials. When possible, we obtain materials from domestic suppliers. At times, due to availability, economic or quality reasons, there is a need  to import components from foreign sources. Where the domestic value is at least 70%, we have labeled the shoe "Made in the USA." Where it falls below 70%, we have qualified the label referencing domestic and imported materials. This determination is based in part on the Federal trade Commission's survey of consumers.

Whole lotta wiggle room there, with a nod to the Feds.  Keep in mind "domestic value" will include all overhead of the operations...  so using just USA labor to make the goods would not be very much cost added...

The expensive part of show making is all of the work management does leading up to the sewing at the end of the line, that management is offshored, making it a less expensive shoe.... 

John

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Why USA Managers Cost Too Much

Another reason is because they have to foot the bill for people who are not productive.  We learn that in the USA, there are nearly one million people with Top Secret security clearance (something tells me there are probably a dozen levels higher than "top" given govt ruination of language whenever it uses it.)  My first reaction was "and how many of those million are working for the other side?"  Point is, for someone to have such a security level, they must work in a very expensive secure environment, with lavish expense and support.  The cost comes out of the pockets of the productive.

We learn a Private First Class has released a 100,000 pages of documents telling us of the criminality of our attack on the Middle East.  Of course we all knew this before his leaks, but he is a true Jeffersonian American, and should be in USA explaining himself instead of a Kuwaiti prison.  Bring Pfc Bradley Manning home!  But back to the topic, all of this is paid for, at least billed to, productive Americans.

When the Soviets invaded Afghanistan, USA and China supported the formation of al Qaeda, and trained bin Laden and his crew.  Taliban just means "students" in Pashtun, and was a student movement, a reaction to the chaos which followed the Soviet withdrawal. When they did not let our oil cross their country on our terms, we attacked.

China seems to have played their cards better: they get more oil from the middle east than we do, and have no troops committed there.  As I said before, it is a lot cheaper to buy the oil than fight for it.

To get into a service academy is a political process: a congressman nominates you to West Point or Annapolis, etc.   Congress decides who becomes a general or admiral.  The Bush family always removes the serving officers before they start a war, likely because the officers who know best are against the adventure. This means our top officers in war are political hacks, and certainly unworthy of the soldiers who serve under them.

Losing a war is costly too.  The powers that be will remain in power win or lose.  Cheney and Rumsfeld and most of the neocons were serving in the Nixon administration when Vietnam defeated the USA. They went on to do the exact same thing again in the middle east.

AS long as USA is directing its productive capacity to pointless elective war, USA productive management has to bear the cost.  China's economic success is relative: they are not fighting wars.  Declare victory, come one home,  and let's get back to work.

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